US hedge funds set to take over at Travelodge

Two US hedge funds are poised to wrest control of Travelodge from Dubai's
sovereign wealth fund as the UK budget hotel chain struggles beneath a £530m
debt pile.

Dubai International Capital bought Travelodge in 2006 for £675m in a deal that involved £475m of debt financing.

By Nathalie Thomas

6:46PM GMT 19 Feb 2012

Avenue Capital and GoldenTree Asset Management, both based in New York, have agreed to underwrite a £60m loan to the hotel operator, which has battled to keep up with interest repayments of almost £100m a year.

The two funds, plus a third party, believed to be an investment bank, have agreed to intervene in return for control of the company.

They are in the process of hammering out a debt-for-equity swap, which will see Dubai International Capital (DIC), the investment arm of Dubai's sovereign wealth fund, sever its ties to the leisure group.

Sources close to the deal say DIC will be left nursing losses of £400m on its investment.

DIC bought Travelodge in 2006 for £675m in a deal that involved £475m of debt financing.

Although the company has continued to perform well through the economic downturn – last year it saw profits rise 20pc to £55m on revenues up 16pc to £370m – the interest on its debts has become unsustainable.

DIC injected £20.1m into the group in 2009 as part of a deal with lenders to relax its covenants but the investment company is understood to have been unwilling to write a cheque for further capital.

Earlier this month, Avenue Capital and GoldenTree Asset Management were involved in pumping a £10m emergency loan into Travelodge ahead of refinancing talks. They have been lenders to the company since 2006 but have recently bought up more of its loans.

Negotiations are now under way with senior lenders, including Babson, Barclays, Investec and Royal Bank of Scotland, to see if they are prepared to inject some of the £60m needed to keep Travelodge afloat.

But a spokesman for the hotel company stressed that the two US hedge funds had already agreed to underwrite the loan. He said it was therefore business as usual for staff and customers.

The spokesman said: "It is for a medium-term loan facility as the existing one comes to an end. We have that underwritten, we will get that £60m."

Both Travelodge and rival Premier Inn have been expanding aggressively over the past few years.

Despite its debt woes, Travelodge recently announced plans to create 1,000 jobs through a £250m-plus expansion.